THE ACIT, CIRCLE-1(1), ERNAKULAM, ERNAKULAM vs. SRI.E.M.PAUL, EDAKATTUKUDIYIL, KOTHAMANGALAM

Per CHANDRA POOJARI, AM:

These appeals filed by the assessee and Revenue in the case of different

assessees are directed against separate orders of the CIT(A)-II, Kochi and

pertain to the assessment year 1999-2000.

03/03/2009 and were disposed of vide order dated 13/03/2009 wherein it was

held as under:

I.T.A. Nos.605/Coch/2005 & others

“4. We have heard the ld. Counsel for the assessee and the learned Departmental Representative at length. The only issue is whether the sale consideration as found in the document has to be taken as accepted or as adopted by the authorities below has to be taken into consideration. After carefully considering the rival submissions and on perusal of the material available on record, we are of the view that the value of consideration as shown by the assessee in the return of income i.e. sum of Rs. 2.75 crores has to be adopted.

I.T.A. Nos.605/Coch/2005 & others

with any other piece of evidence, materials gathered by the Assessing Officer.

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Jurisdictional High Court. After hearing the Departmental Representative, the

Jurisdictional High Court by judgment in ITA Nos. 1771,1801,1804/2009,

7,13,14,34,35,45&50/2010 dated 20/10/2017 decided the issue as follows:

“2. This appeal is filed by the Revenue impugning the order passed by the Income Tax Appellate Tribunal, Cochin Bench in ITA No.605 of 2005 concerning the Assessment Year 1999-00. By the said order, the appeal filed by the respondent assessee was allowed by the Tribunal and this order is impugned by the Revenue framing the following questions of law for the consideration of this Court:

“1. Whether, on the facts and in the circumstances of the case and in the light of the admission by the assessee in the sworn statement, the Tribunal is right in law and facts in interfering with the assessment based on the admission in the sworn statement?

i. The assessee is aware of right and wrong with regard to his own thoughts and actions?

ii. A clear and alert mind?

(b) If the answer to question 2(a) is in the affirmative, the Tribunal is right at all in ignoring the admission in the sworn statement?

(c) Should not the Tribunal have preferred admission by the assessee to the document relied on by the Tribunal and is not the order not preferring the admission absolutely perverse and against all canons of law?

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(d) Justified in interfering with the assessment?

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The only issue now before us is with regard to assessment of understatement of

sales consideration of Kavitha Theatre land at Rs. 6.50

crores as against the Rs.2.75 crores shown by the assessee in the return of

income on the basis of sworn statement of the assessee, though it was retracted

on later occasion.

Sait, residing at No.35/250, Automobile Road, Mamangalam was running a

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theatre called 'Kavitha Theatre' at Ernakulam since 1983. On 14.8.1998 he

entered into a partnership with the following persons for converting his

proprietory concern of M/s. Kavitha Theatre into a partnership concern of the

same name i.e. M/s. Kavitha Theatre, Ernakulam.

(1) E. M. Johny s/o. E. V. Mathai, aged 55 years

(2) E. M. Paul s/o. E. V. Mathai, aged 53 years

(3) Jose Mathews/o. E.V. Mathai, aged 46 years

(4) Dr. Xavier Mathew s/o. E. V. Mathai, aged 45 years

(5) James Mathew s/o. E.V. Mathai, aged 41 years

(6) Tomy Mathew s/o. E. V. Mathai, aged 26 years

(7) Martin Johny s/o. E. M. Johny, aged 23 years, and

(8) E. J. Sony s/o. E. M, Johny, aged 21 years

As per the partnership deed dated 14.8.1998 all the aforesaid partners are

residing at Kothamangalam. As per this partnership deed, the assessee had

introduced into the partnership firm his capital in the form of Kavitha Theatre, in

Sy. Nos.633/1, 633/2, 635/1 and 635/2 in the Ernakulam District, on an area of

land of 87.990 cents consisting of the theatre and other buildings including the

shop building in the premises, with all the machinery, furniture, fixtures and

equipments therein. As per the clause (5) of the Partnership Deed the assessee

had introduced into the firm the aforesaid assets totally valued at

Rs.2,99,17,807/- along with the outstanding liability of Rs.13 lakhs owing to M/s.

Sylcon by way of security deposit of Rs.7 lakhs and loan of Rs.6 lakhs. The

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details of the valuation are given in the Schedule A attached to the deed of

partnership. The schedule A reads as under:

“Share contribution of Essa Ismail Sait”

Serial No. Value of assets Valuation 1. Land 87.990 2,75,00,000.00 2. Building 2,92,301.92 3. Interior decoration 4,006.26 4. Sanitary fittings 632.91 5. Electrical fittings 3,168.00 6. Office Equipments 15,909.43 7. Typewriter 1,514.25 8. Fire Equipments 6.19 9. Carpet 1,311.34 10. Office furniture 68,992.63 11. A/c Plant 4,54,254.59 12. Projector fittings 35,427.94 13. Generator 6,81,911.73 14. Ultra Stereo 8,41,964.63 15. Screen 16,406.25 2,99,17,007.37

Less: Outstanding liability to Sylcon (security deposit and loan) 7,00,000 + 6,00,000 13.00.000.00 Rs.2,86,17,807.37

5.1 It was seen that the assessee had introduced into the partnership firm the

assets from Sl. Nos. 2 to 15 above (i.e. all the assets including the theatre

building but excluding the land) at the written down values as appearing in the

balance sheet as on 31.3.1998. In other words, the assessee had revalued only

the land of 87.990 cents at Rs.2,75,00,000 as on 14.8.1998 appearing In the

balance sheet as on 31.3.1998 at the book value of Rs.2,08,535/-. The clause

'(9)' of the partnership deed provides that the assessee would discharge the

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liability of Rs.27 lakhs (approximately) to the Dhanalakshmi Bank and a liability

of Rs.10 lakhs to the Swargachithra Films as his personal liability. Thus, the net

value of the capital introduced by the assessee in the firm in kind as on

14.8.1998 was Rs.2,86,17,807/-. The other partners of the firm had brought in

the following amounts as initial capital:

5.2 After forming the partnership as above, the assessee gave a notice dated

11.9.1998 to the firm, M/s. Kavltha Theatre expressing his intention to retire

from the said firm with effect from 15.10.1998. This notice was given by the

assessee in terms of the clause 15 of the partnership deed dated 14.8.1998. In

pursuance of this notice, the partnership was re-constituted on 18.10.1998

permitting the assessee to retire from the firm, and introducing another partner,

Shri Saju Johny, s/o. E.M. Johny, aged 27 years into the firm with a capital

contribution of Rs.6 lakhs. As per the clause 16 of the Partnership Deed it was

provided that the assessee was entitled to the following amount from the

assessee firm as specified in the Schedule 'A' of the Partnership Deed on that

date:

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Amount due to Sri Essa Ismail Sait - the retiring partner as on 18.10.1998

Balance as per Ledger A/c. Rs.2,86,17,507 Less: Withdrawal from firm Rs. 70,00,000 Balance Rs.2,16,17,507 Add: Profit of share (sic) from the firm Upto the period 18.10.1998 Rs. 1,50,000

Total amount due to Shri Essa Ismail Sait Rs.2,17,67,507 Less:Loan taken from Shri E.M. Johny and Other partners now adjusted as agreed Rs. 65,00,000 Net Amount Rs.1,52,67,507

The deed does not say when this amount would be paid to the assessee. It was

also provided in the clause 20 of the deed that the assessee would sign any

paper or document required for effecting any change/transfer of the title deed of

the property of the partnership or any licence issued by any authority in

connection with the affairs of the partnership business. Accordingly, the assessee

had executed and registered on 21.10.1998 a deed for the transfer of the title of

the landed property, in the name of the firm, M/s. Kavitha Theatre. As per this

deed the assessee had disclaimed any right in the alleged property of M/s.

Kavitha Theatre transferred to the firm already. The deed said that it was

executed for the transfer of the "janmam" rights of the assessee in that property

in the name of the firm Kavitha Theatre. The consideration shown in the deed in

this regard was Rs.1,00,000/-. For the A.Y. 1999-2000, the assessee filed the

return of Income on 11.11.1999 in the Income Tax Office, Division-II,

Ernakulam, declaring NIL income. The computation of total Income as per this

return was as under:

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Income from Business (-) Rs.22,92,332 Long Term Capital Gains Consideration received on transfer of 87.990 cents of land on M.G. Road, Kochi on 14/08/1998 Rs.2,75,00,000 Less: Expenditure on transfer Rs. 5,000 Net consideration received Rs.2,74,95,000 Less: Cost of acquisition Rs. 2,08,535 Date of acquisition 1.1.1968 Fair market value as on 1.4.1981 Rs. 70,31,720 Indexed cost Rs.2,47,07,662 Capital gains on transfer Rs. 27,87,338 Less: Exemption u/s. 54F In respect of the new house property purchased 75,00,000 x 2787338/27495000) Rs. 7,60,321 Taxable Capital Gains Rs. 20,27,017 Gross Total Income (-) Rs. 2,65,315/- Net Taxable income NIL T.D.S. Rs.24,000 Tax refundable Rs. 24,000

5.3 The return was accompanied by a Profit and Loss A/c. and Balance Sheet in

respect of the proprietary concern, M/s. Kanmani Films, M.G.Road, Kochl. It was

also accompanied by the Profit & Loss A/c. of the proprletory concern, M/s.

Kavltha Theatre upto 13.9.1998 as per which there was a net profit of

Rs.2,57,51,867/-. The net profit was on account of the credit of Rs.2,72,91,464/-

by way of capital gains on transfer of land to the firm. This amount was credited

in the P & L A/c. by adopting the value of land of 87.990 cents at

Rs.2,75,00,000/- as per the Partnership Deed dated 14.8.1998 and reducing

there-from the book value of the land of Rs.2,08,535/-. The return was also

accompanied by a Balance Sheet of Shri Essa Ismail Sait as on 31.3.1999, which

showed the assessee’s assets and liabilities on 31.3.1999 as under:

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BALANCE SHEET AS ON 31.3.1999

LIABILITIES ASSETS Essa Ismail Sait - capital A/c. 4881745.06 Fixed Assets 3173391.62 (As per schedule) Essa Ismail Sait –current A/c 23956297.33 Loans & Advances (As per Schedule) 1308897.85 Essa Ismail Sait –Kanmani’s A/c 1251056.00 Cash at Bank 20492996.56 Sundry Creditors (As per Schedule) 41845.80 Cash in hand 448602.46

TDS-Income tax 24000.00

J.M.H.E.S. 477483.17 Dharmasthapanam

H.E.A.M.S. 239932.00 Dharmasthapanam

Investments:

Federal Bank Share 5000.00

Dhanalakshmi Bank Share 127500.00

Loss in Kanmani A/c.

Op. Balance 3077206.01

Add: For the year 755934.52 3833140.53

30130944.19 30130944.19

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The particulars of the cash at Bank show that the assessee was having a total

amount of Rs.2,04,92,996/- in his several bank accounts as on

31.3.1999. The particulars of the amounts in various banks are as

under:

Federal Bank a/c.13458 227966 Dhanalakshmi Bank A/c.813 1259.93 Dhanalakshmi Bank a/c. 608 4548.22 Dhanalakshmi Bank 134.97 Central Bank of India 2913.33 Bank of India 130.10 Syndicate Bank 188350 Federal Bank a/c 1068 824.79 Dhanalakshmi Bank 62.66 Central Bank of India A/c.8786 629.79 Lord Krishna Bank 1052.59 Nedungadi Bank 965.00 Federal Bank A/c 1056 3696.46 SBI-Ooty 20467000.00

Bank & cash Balance: Kanmani

Federal Bank A/c No.1196 1101.44 Federal Bank. Madras 863.03 Central Bank of India 653.62 Union Bank of India A/c.21055 285.00 Union Bank of India 260.00 Central Bank, Madras No.1 90.42 Central Bank, Madras No.2 884.39 State Bank of India 346. 00 Federal Bank 960.00 Cash in Hand 171.66 20492996.56

5.4 After the filing of the return showing a loss, the assessing officer issued an

intimation u/s. 143(1)(a) on 1.2.2002 accepting the loss returned and issuing a

refund of Rs.31,680/-. Subsequently, the assessing officer issued a notice u/s.

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148 on 7.6.2002 to reopen the income tax assessment in order to assess the

capital gains from the sale of M/s. Kavitha Theatre at an amount of Rs.6.5 crores

as against the declared sale consideration of Rs.2,74,95,000/- shown by the

assessee in the return of income.

5.5 In the meantime, the DDI (Inv-II), Ernakulam received information that

there was suppression of sale consideration in the document of transfer of the

Kavitha Theatre. The DDI (Inv-II), Ernakulam thereupon issued a summons u/s.

131 to the assessee and took a sworn statement from him on 23.4.1999. The

sworn statement was taken in the presence of the witness, ShrJ P.M. Abukoya.

20/565 Nambiyapuram, Palluruthy, Kochi-6 who was a personal aide of the

assessee, when the assessee was staying in Dhanya Nursing Home,

Palarivattom. (It is worth mentioning that the assessee at the relevant time was

staying at a rented house in Ooty and was visiting Ernakulam frequently. At

Ernakulam, the assessee was staying at Dhanya Nursing Home.). As per the

sworn statement, the assessee had stated that he was engaged in the business

of distribution of the film, Chemmeen, under the banner of Kanmani Films,

which is his proprietary business. He stated that his sources of income included

income from his proprietory concern, M/s. Kanmani Films and the interest on

loan given to Smt. Sobhamony, Kizhakemadom Chitty Funds, Behind Padma

Theatre, Ernakulam. He stated that he had advanced an amount of Rs.1 crore

on pro-notes and cheques to Smt. Sobhamony. He stated that the rate of

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interest of the advance was 18% per annum and that the interest was being

received in cash every month. He stated that he had no other source of

income. He replied to question No.3 that there was no amount due to him

from others except the amount of Rs.1 crore advanced as stated earlier and

the amounts due to him as per the books of accounts of M/s. Kanmani Films.

He also stated that he had no liabilities to any one other than the trade

liabilities in the books of M/s. Kanmani Films. The assessee stated that his main

liability had been to Shri Siraj, Valiaveetil Financiers, Market Road, Ernakulam

and that he had discharged those liabilities amounting to between Rs.1.25 crores

and Rs.1.50 crores owing to that person during the last one year. He could not

confirm whether this liability had been accounted in the books of accounts of his

business or not. He further stated that he had discharged liabilities of nearly

Rs.50 lakhs to other financiers during the last one year. He stated that as on

23.4.1999 he owned 35 cents of land at Ooty, which had been purchased six

months back at a price of Rs.1 lakh per cent. He stated that he was constructing

a house there. He also stated that the architect of the building was one Shri

Jayachandran, Trivandrum and that the plinth area of the building was 4000

sq.ft. On the date of the sworn statement the foundation of the building had

been completed and he had spent an amount of Rs.10 lakhs for the construction

of the building till that date. He stated that he was paying rent for his residence

at Ooty amounting to Rs.15,000/- per month. He further stated that he was

having an expenditure for his personal purposes of Rs.60,000/- per month

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excluding rent and that it was met out of his interest income. In answer to

Question No.10, he stated that the Kavitha Theatre property was sold for Rs.6.5

crores out of which only Rs.3 crores had been accounted. It was stated that the

accounted amount was received by cheques/drafts etc. while the balance money

was received in cash on various dates. As regards the utilisation of the cash he

stated in answer to question No.11 that the amount of Rs.3 crores had been

utilised for repaying the unaccounted loan he had taken from Shrl Siraj and

several other smaller parties. The balance amount was utilised for the purchase

of the Ooty property, for discharging the bank liabilities, HP liabilities for car and

for his personal and living expenses etc. He also stated that he had invested

about Rs.50 lakhs by way of deposits in the name of his wife, Smt. Farhana Essa

Ismail Sait in the SBI, Ooty. He further stated that his wife had no independent

source of income. This statement was retracted by the assessee and his wife

Smt. Farhana Sait on 05/05/1999. From the Departmental records, it was seen

that the Addl. DI (Inv.), had forwarded on 7.7.1999 a copy of the report of the

DDI (Inv.-II), Ernakulam dt. 26.5.1999 along with a copy of the sworn statement

taken on 23.4.1999 to the ACIT, Circle-I, Div.II, Ernakulam who was the

assessing officer of the assessee. It was noted that the assessee had filed the

return of income on 11.11.1999 declaring the sale consideration of the Kavitha

Theatre at Rs.2, 75,00,000/- which in the sworn statement u/s. 131 the assessee

had stated the sale consideration to be Rs.6.5 crores. It is seen that the DDI

(Inv-II), Ernakulam has again forwarded to the AO on 3.8.2000 a copy of his

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report dt. 27.7.1999 addressed to the DI (Inv), Cochin on the same matter. The

A.O. issued the notice u/s. 148 on 7.6.2002 in the light of the above facts to

reopen the assessment proceedings to assess the full sale consideration of

Rs.6,50,00,000/- in place of Rs.2,75,00,000/- disclosed by the assessee.

5.6 The Assessing Officer, after re-opening of the assessment u/s. 147 issued a

notice u/s. 143(2) of the Act to the assessee for hearing the assessee’s case. By

the Assessing Officer’s letter dated 22/01/2004, the assessee was asked to

explain why his total income should not be worked out by taking into account the

sale consideration of the Kavitha Theatre land at Rs.6,50,00,000/-It was seen

that the assessee had replied to the above letter on 29/01/2004 stating as

under:

"For A.Y 1999-2000 1 have filed my return on 11.11.1999 (Receipt No. 110377), which should be treated as my correct state of affairs during that period. In your letter you have indicated the sales consideration for my M.G. Road property as Rs.6,50,00,000/- and have shown interest bearing deposits with Kizhakemadom Chitty Funds and SBI, Ooty. You have arrived at these findings based on a Sworn statement before the Dy. Director of Income Tax on 23.4.1999 which I find it very difficult to recollect. What I understand from my previous staff is that during that time I was undergoing treatment for severe depression and was hospitalized with Dhanya Nursing Home, Palarivattom. If at all I have given some statement that was not the correct state of affairs, which 1 have retracted and my staff has provided evidence to the concerned officers. A copy of the medical certificate which is in my possession is attached to this letter.

Sales consideration I have received for the M.G. Road property is Rs.2,75,00,000/- and not Rs. 6,50,00,000/-. Capital gain has to be worked on the amount of Rs.2,75,00,000/- and that has been disclosed in my I.T. return. From the sales consideration I would have given advances to my close people which I do not have any details. But no amount has been given

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on interest and no people are coming and returning any money to me. You have also indicated that I am earning interest from SBI Ooty, but to my knowledge I do not have any deposit with SBI Ooty. I have purchased a property in Ooty for which a part of the sale consideration would have been sent to SBI Ooty. I am attaching copies of SBI Ooty statement for that period for your reference. Therefore I humbly request you not to complete the assessment for A.Y. 1999-2000 as proposed by you "

The Assessing Officer rejected the assessee’s claim and adopted the sale

consideration of Rs.6.5 crores in the working of capital gain on the transfer of

the Kavitha Theatre. The Assessing Officer stated in paras 4 & 5 of the order as

follows:

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alert and intelligent, such a device cannot be evolved to tactfully evade the provisions of a well drafted Act. By this one instance itself, it can be seen that the assessee was in a very normal condition and his intelligence was working at a very high level. Hence the argument that the sworn statement was given in confused mind as he was undergoing treatment for depression has to be ruled out. Moreover, a bare perusal of the sworn statement shows that he had given a detailed convincing and cogent replies to the various questions raised. He has clearly stated the amount received and how he had spent the same. This can come only from a person of normal state of mind.

It is true that subsequent to the sworn statement, the assessee's wife Smt. Farhana Ismail Sait had sent a letter to the Department on 04.05.1999 alleging that the statement given by him on 23.04.1999 was not correct and that the assesses was not in his normal state of mind. Here it is strange to note that the assessee's wife had taken pains to inform the department that the sworn statement given by the assesses should not be acted upon, but she has not done anything to nullify the transfer of property at a paltry sum of Rs. 3 crores when the property was worth Rs. 12 crores. Had Rs. 3 crores been the correct consideration passed, she, who was careful enough to defend her husband from the I. T. Department, should have immediately taken action to nullify the transfer of the coveted Kavitha Theater Complex for such a meager sum. Thus putting two and two together, it can be very well seen that the actual consideration can be only Rs. 6.5 crores as has been admitted by him in the sworn statement and capital gain has to be determined accordingly." Accordingly, the assessing officer determined the total income of the assessee as under:

I. Business loss as claimed (-) 22,92,232 Less: 1. Retrenchment compensation Disallowed 8,85,489 2. Donation disallowed 3,200 8,88,689 Business Loss (-) (-)14,03,543

II. Long Term Capital Gain: Sale consideration of 88.740 cents of land 6,50,00,000 Less:Indexed cost of acquisition Cost as on 1.4.81 70,39,220 7039220 x 351/100 247,07,662 Add: Expenses on sale 5,000 247,12,662 Long term capital gain Rs. 402,87,338 Total Income Rs. 388,83,795 Rounded off to Rs. 388,83,800

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cents of land in which a building with a cinema theatre was situated. A portion of

the building was let out on rent. In the year 1998, the assessee had decided to

convert the proprietary business into a partnership firm. Accordingly, a firm was

constituted on 14/08/1998 by inducting eight more persons as partners which

was evidenced by a registered deed dated 14/08/1998. The incoming partners

had brought their capital amounting to Rs. 70 lacs. The assessee had brought in

the aforesaid land and building as his share capital in the firm which was

recorded in the books of the firm as under:-

Land 2,75,00,000 Building 2,92,301 Other assets such as generator, a/c plant etc. 21,25.206 Total 2,99,17,507 Less: Outstanding liabilities to the tenant Sylcon as security and loan 13,00,000 Share capital of appellant 2,86,17,507

7.1 In the light of the above, it was submitted that the land together with other

capital assets became property of the partnership firm in which the assessee

was also a partner. On the other hand, the assessee had transferred 87.990

cents of land belonging to him in favour of the firm for a consideration of Rs.

2,75,00,000 on 14/08/1998. The business carried on by the assessee was

continued as a going concern. The assessee was the Mg. partner of the firm with

50% profit sharing right.

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7.2 It was further submitted that no capital gains is chargeable in the cases

where a partner brings a capital asset in to the firm as his capital on admission

or the firm distributes a capital asset amongst the partners on dissolution or

otherwise for a period prior to 01/04/1988 because transfer of capital asset did

not take place in those transactions by virtue of clause (ii) of section 47 of the

Act. According to the Ld. AR, clause (ii) of section 47 was omitted and enabling

clauses (3) & (4) to charge capital gains in such cases were introduced in section

45 by Finance Act 1987 w.e.f 01/04/1988. As per clause (3) of section 45

profits and gains arising from the transfer of capital asset to the firm on

14/08/1998 is chargeable to tax. It was submitted that it was specifically stated

in the said section that for the purpose of computing capital gains under section

48, the full value of the consideration on transfer shall deemed to be the amount

recorded in the books of the firm. Accordingly, it was submitted that Long Term

Capital gains of Rs 20,27,017/- was computed and declared in the return filed

under section 139 of the Act. The computation is as under:

Full value of consideration on transfer of 87.99 cents of land being the amount Recorded in the books of firm as per section 45(3) 2,75,00,000 Less: Expense 5,000 Net consideration 2,74,95,000 Less: Indexed cost of acquisition 2,47,07,662 Capital gains 27,87,338 Less: Exemption under section 54 F for new house for Rs 75,00,000 7,60,321 Capital gains chargeable Rs.20,27,017

7.3 In view of the above, it was submitted that profits and gains from transfer

of a capital asset to the firm as share capital by a partner on admission can only

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be charged as capital gains in the hands of partner under the provisions of

section 45(3) and for the purpose of computation of such gain full value of

consideration on transfer should be the value of the asset recorded in the books

of the firm. The Ld. AR submitted that the assessing officer was not statutorily

empowered to adopt value other than the value recorded in the books of the

firm as full value of consideration. According to the Ld. AR, the adoption of Rs.

6,50,00,000/- in the assessment made under section 143(3) r. w. s 147 as full

value of consideration in the computation of capital gains in respect of transfer of

land by the assessee to the firm is not in order.

7.4 It was submitted that the CIT(A) while confirming the adoption of Rs 6.50

crores as full value of consideration on transfer, had overlooked the provisions of

section 45(3) which is the only enabling provision to charge capital gains as

income of the assessee in respect of transfer of capital asset to the firm and

specifically the deeming provision therein to adopt the amount recorded in books

of the firm as full value of consideration. According to the Ld. AR, the Apex

Court's judgment in Sunil Sidharthbhai Vs. CIT (1985) (156 ITR 509), relied on

by the CIT(A) in which examination by the assessing officer as to the

genuineness of the transaction and formation of the partnership firm was

justified, had been rendered for a period prior to 01/04/1988. Moreover, it was

submitted that the genuineness of the partnership was examined by the Apex

Court in a petition filed for Special Leave from the judgment and order dated

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16/05/2005 of the High Court of Kerala in RCR No. 307/2004. The Apex Court

vide judgment dated 08/08/2005 dismissed the SLP and held that the formation

and the reconstitution of the firm M/s. Kavitha Theatre was valid. Hence, capital

gains chargeable in the assessee’s case can only be computed under clause (3)

of section 45 of the Act. It was submitted that the decision of the CIT (A) on

this count was rendered without appreciating the full facts and the position of

law on the issue.

7.5 The Ld. AR submitted that the sworn statement was recorded on

23/04/1999 by the DDIT(lnv-II), Ernakulam from the assessee while he was

admitted in hospital. On the next day i.e., on 24/04/1999 the assessee’s wife

Mrs. Farhana, vide, letter addressed to the DDIT had intimated that the assessee

was not competent to swear any statement due to the influence of heavy doses

of medicines administered on him and the assessee himself had written a letter

on 05/05/1999 to the DDIT in which he retracted from all the statements

together with reasons thereof. A certificate to that effect from the doctor dated

27/04/2009 was also submitted. Without taking into account the retraction and

without making any further inquiry as to the genuineness of the reason for

retraction, it was submitted that the assessing officer had initiated re-

assessment proceedings under section 147 of the Act to assess the capital gains

on the basis of consideration admitted in sworn statement recorded on

23/04/1999.

I.T.A. Nos.605/Coch/2005 & others

7.6 The Ld. AR objected to the Assessing Officer’s finding that the sworn

statement was given in a confused mind as the assessee’s action to form a

partnership and transfer the capital asset without paying stamp duty can be

expected from a person having a very high level of intelligence. The formation of

partnership was in 1998 and the statement was recorded in 1999. It cannot be

said that a person with high level of intelligence will not become a person of

confused mind later due to intake of heavy doses of medicine as a part of

treatment.

7.7 Moreover, it was submitted that the identity of persons from whom the

money received was neither stated by the assessee in the statement nor had it

been obtained by the assessing officer with supporting evidence and no cross

verification with the payer was made in the course of assessment to establish the

reliability of statement especially when the person retracted from the statement

within a fortnight and the alleged recipient of the payment is assessed to tax in

Ernakulam. It was further submitted that the correct position in this regard, on

appreciating relevant facts, was decided in the earlier order dated 13/03/2009.

Hence, it was submitted that no capital gains can be chargeable on the basis of

sworn statement recorded on 23/04/1999.

state of the assessee at the time of the recording the sworn statement from him

I.T.A. Nos.605/Coch/2005 & others

on 23/04/1999. The assessee was undergoing treatment, at that point of time.

But, according to the Ld. DR, it was proven beyond doubt that he was a person

of high intelligence and he could manage his affairs (regarding the sale of

Kavitha Theatre) in such a manner as to circumvent the provisions of chapter

XXC the IT Act. Moreover, the Ld. DR submitted that the High Court of Kerala

had set rest this issue by rejecting the assessee's arguments on this issue and

referred to the High Court’s order dated 20/10/17:

"Further, the Tribunal has also not properly appreciated that it was the assessee who himself in his sworn statement admitted that Rs. 6.5 cr was paid to him as the sale consideration. We are also not impressed with the inference of the Tribunal about the medical condition of the assessee at the time when he gave the sworn statement which was relied on by the department. According to us, it was without examining the cases pleaded by the revenue and the assessee in its entirety that the Tribunal has allowed the appeal of the assessee and fixed the sale value at the rate as returned by the assessee".

8.1 The Ld DR. submitted that Shri Essa Ismail Sait was already showing

Rs.2,04,67,000/- as cash at bank on 31/3/1999. According to the Ld. DR, Shri

Sait had mentioned that the accounted amount was received by cheques/drafts

etc. while the balance amount was received in cash on various dates. Had the

sale consideration been only Rs.2,75,00,000/-, then the aforesaid investments

could not have been made. It was submitted that the assessee had advanced a

loan of Rs. 1 Cr. to Smt. Shobhamony, had discharged his loan liabilities,

invested in the bank accounts and also purchased property at Ooty and the total

of all these amounts far exceeded the sum of Rs 2,75,00,000/- disclosed as sale

consideration by the assessee. It was submitted that the dates, mode and

I.T.A. Nos.605/Coch/2005 & others

quantum of the various loans advanced by the assessee, investments made in

the bank accounts, liabilities discharged by the assessee accounted and

appearing in the book as on 31/3/1998 and also the unaccounted liabilities of

Shri Siraj and others, investments in the property at Ooty and various personal

and domestic expenses met by the assessee did not tally with the corresponding

particulars of the receipts amounting to Rs.2.75 Cr. received from the purchasers

of Kavitha Theatre. The Ld. DR submitted that the assessee’s own statement

was in conformity with the real situation. As such, she placed reliance on the

additional evidence in the form of following documents:

8.2 Further, the Ld. DR submitted that in Ground No. 4, the assessee has

alleged that the sworn statement was recorded without obtaining written

permission of the physician of the nursing home. This is not true. The certificate

of the physician is available in the file. Dr. Ajith Bhaskar, MBBS, DPM who

I.T.A. Nos.605/Coch/2005 & others

treated the assessee states that he was under treatment from 1990. During this

entire period from 1990 to 23/04/1999 when the sworn statement of the

assessee was recorded, assessee has been leading a normal life – attending

press conferences, award functions, distributing films, running the theatre and

his other business etc. The statements given by the assessee on 23/04/1999 are

that of an intelligent person with a clear mind. The retraction statement given on

05/05/1999 is only an afterthought.

8.3 The Ld DR submitted that the sworn statement given by assessee and his

wife Farhana Sait, the witness who signed the sworn statement, Shri Abu Koya

who was a close associate of Essa Sait have all along being saying that Shri Essa

Sait owes money to Mr. Siraj, Valiya Veettil Financiers and out of the money he

owes to Siraj, substantial portion of it was cleared out of the proceeds of Kavitha

Theatre.

8.4 According to Ld. DR, the retraction statement dated 5/5/1999 seems to be

only an afterthought. The matter having been taken by the Investigation Wing,

the assessee on being enquired by the officers of the Wing declared the correct

facts. Thereafter, retracted the statement, raising some not very strong medical

grounds.

I.T.A. Nos.605/Coch/2005 & others

8.5 She strongly objected to the Ground No.8 of the assessee which is on the

finding of the CTT(A) that the witness has not given any statement to the mental

condition of the appellant. The assessee states that the witness is only a

'witness' to the fact that it was signed by the person making the statement. Here

the point is that the witness Shri Abu Koya is a close associate of Shri Babu Sait.

He has been with him through thick and thin. He is aware of all the affairs- both

business and personal of the assessee. It is in that context that the CIT(A) said

that the witness has not mentioned anything about the mental conditions of the

assessee.

8.6 She submitted that Shri Essa Sait in his sworn statements has listed how

money was spent by him. He has stated that 6.5 Cr. was the total sale

consideration received for sale of Kavitha Theatre. She explained that the

following evidence will show how the money was spent by assesssee:

1) VDIS declaration by Shri Siraj, Valiya Veettil Financiers, Market Rd. Ernakulam –Rs. 1.14 Cr.

2) Farhana Sait’s letter to Assistant Commissioner of IT (refer to page No. 4, wherein she lists out the property held by Shri Babu Sait). She states ‘Kavitha Theatre – sold for Rs.6 Cr. in the year 98’.

3) Farhana Sait’s sworn statement. The questions she answered on investments in Ooty property. She says, Shri Essa Sait spend Rs.35 lakhs for the construction of a 4000 sq. ft. house by the name Farhana Mansion. She also states that he had invested Rs. 97 lakhs in her name in SBI, Ooty. Smt. Farhana Sait has no source of income other than what is provided by Shri Babu Sait.

I.T.A. Nos.605/Coch/2005 & others

4) The sworn statement of Smt. Shobhamony, wherein she has admitted having accepted Rs. 1 Cr. from Essa Sait and a registered document evidencing the transaction of Rs.1 Cr. entered into between Shobhamony and Essa Sait. Shri Essa Sait was paying interest @ 18% on this 1 Cr. form Feb. 1999.

5) Bank statement of Shri Essa Sait during the period from 1/8/98 to 31/3/2000

6) Evidence for Rs.55,00,000/- through TT from his bank account at Kochi.

7) FD of Rs.1,50,00,000/- through TT from his bank account at Kochi.

8) She also drew our attention to the balance sheet as on 31/03/1999. It clearly shows an amount of Rs.2,04,67,000 at SBI, Ooty as bank balance as on 31/3/99 and to TDR in the name of Farhana Sait on 23/12/98. Rs.75,68,671/- is credited in the A/c of Farhana Sait maturity proceeds of a TDR.

i) Sworn statement of Shobhamony recorded by the TRO on 29/03/2005.

It was stated that she was conducting chitty business and received Rs. 1

Crore from Ismail Sait in three instalments of 25 lacs, 50 lacs and 25 lacs.

It was also stated that she had returned Rs 37 lacs in instalments out of

the advance. With regard to a Question about the present status of the

liability (as on 29/03/2005) it was replied that she was having no idea

about the present position of the liability and presently had no contacts

I.T.A. Nos.605/Coch/2005 & others

with Shri Ismail Sait. This statement does not indicate the date of receipt

and date of repayment of money and it cannot, therefore, be presumed

on the strength of this statement that the advance of Rs. 1 Crore to Smt.

Shobhamony was made out of the alleged amount Rs. 6.50 Crores.

It may also be noted from the sworn statement recorded on 23/04/2009

from Shri Ismail Sait that the details of utilisation of the alleged Rs.6.50

crores stated as answer to Question No.11 does not contain the amount of

Rs. one crore paid to Shobhamony.

ii) Power of Attorney dated 16/06/1999 of Shobhamony.

This document was produced by the department to prove that the

advance of money to Smt. Shobhamony was out of the alleged amount Rs

6.50 Crores. By this document Smt. Shobhamony authorized Shri Ismail

Sait to recover money from her debtors in lieu of advance of Rs.

1,00,00,000/- received from Shri Ismail Sait. The date of receipt of

advance was not mentioned in this deed. It is true that interest due from

February 1999 is stated to be pending on 16/06/1999. But it does not

mean that advance was made in February 1999. Further Shri Ismail Sait

in reply to Q. No. 2 of the statement recorded on 23/04/1999 had stated

that interest at 18 per cent is being received in cash in every month. It

cannot, therefore, be presumed on the strength of this document that the

I.T.A. Nos.605/Coch/2005 & others

advance of Rs. 1 Crore to Smt. Shobhamony was out of the alleged

amount Rs. 6.50 crores. Further, the following mistakes are noticed in this

document.

a. The document is written and notarised on 16/06/1999. However,

Smt. Shobhamony, the person who writes the document, is seen to

have signed the document prior to the date of the deed. The date

written in first page below the signature and above the name is

31/05/1999 .

b. There are no witnesses. The space provided for that purpose is

kept blank.

c. No acceptance of power of attorney from the side of Shri Ismail

Sait and his signature is absent in the document.

d. The power of attorney is not registered and hence is not legally

valid.

In the light of the above defects it cannot be considered the aforesaid

evidence as a valid one and it appeared to be prepared by Smt.

I.T.A. Nos.605/Coch/2005 & others

Shobhanony for her personal interest without the knowledge of Shri

Ismail Sait.

iii). Liabilities to Shri Siraj discharged.

The additional evidence produced by revenue namely copy of Form of

Voluntary Disclosure of income of Rs.1,14,47,800/- by Shri Siraj dated

22/12/1997 did not show that he had given loan to Shri Ismail Sait and

received back any amount from Shri Ismail Sait during the FY 1998-99 or

1999-00 . Hence no inference can be reached regarding utilisation of the

alleged Rs 6.50 Crores on the strength of this document.

iv). Additional evidence such as sworn statement and letter dtd.l5/12/2004 of Smt. Farhana Sait.

a) Smt. Farhana Sait was the ex-wife of Shri Ismail Sait and got legal

\divorce on 21/03/2002. During the FY 1998-99, Shri Ismail Sait had

purchased 35 cents of land in Ootacamund for Rs 35 lacs and gifted 17

cents to Smt. Farhana. She had constructed a residential house in the

gifted property with assistance from Ismail Sait and utilising own funds.

The tax Recovery Officer had attached this property on 10/02/2005 in

connection with recovery of tax arrears of Shri Ismail Sait. The sworn

statement was recorded on 10/02/2005 by the TRO. The letter dated

15/12/2004 of Smt. Farhana addressed to the ACIT, Circle l(l),

Ootacamund was also in connection with the recovery of tax arrears of

I.T.A. Nos.605/Coch/2005 & others

Shri Ismail Sait. Since Smt. Farhana was having no property other than

the residential house, her primary object is to get the property vacated

from the attachment. All her statements before the Income tax

department can, therefore, be regarded as one made for the sole

purposes of avoiding attachment and sale of her residential house, The

additional evidence produced by the Dept. such as sworn statement

recorded by the TRO and letters written by Smt. Farhana with a view to

safeguard her personal interests may not be taken as evidence of

having received Rs 6.50 Crores by the ex-husband on the alleged sale

of Kavitha theatre building in FY 1998-99.

It may also be noted that in the letter dated 15/12/2004 to ACIT, Ooty,

Smt. Farhana has stated that Kavitha theatre was sold for a huge sum

of about four or five crores and the exact amount is not known to her.

This cannot be taken as conclusive evidence of having received on

money as her statement and amount varies from time to time.

iv) Cash in SBI Ootacamund Rs.2,04,67,000/- disclosed in Balance Sheet as at 31/03/1999 .

The balance of SB Account in SBI Ooty as on 31/03/1999 as per bank

statement comes to Rs.9298/- only. The deposit in SBI shown in the

Balance Sheet as on 31/03/1999 at Rs.2,04,67,000/- is inclusive of the

I.T.A. Nos.605/Coch/2005 & others

Savings Bank account and term deposit which was out of the amount

drawn from the capital account credit balance in the firm. The details

are itself in the partnership deed dated 18/10/1998.

various case laws cited by the parties in this case. On 14/08/1998, the assessee

had introduced into the partnership firm his capital in the name of M/s. Kavitha

Theatre in Sy. Nos. 633/1, 633/2, 635/1 and 635/2 on an area of land of 87.990

cents, consisting of theatre and other buildings for a sale consideration of

Rs.2.75 crores. Later on, the partnership firm was re-constituted on 18.10.1998

wherein the assessee retired from the partnership and introduced another

partner into the firm with a capital contribution of Rs. 6 lakhs. On 21/10/1998,

the assessee executed and registered sale deed, transferring his right over the

said landed property which was introduced as capital in the form of M/s. Kavitha

Theatre for a consideration of Rs.2.75 crores. However, the DDI(Inv.)-II,

Ernakulam found that the sale consideration of the said property was Rs.6.5

crores. Thereafter, DDI(Inv.-II), Ernakulam issued summons u/s. 131 of the Act

and recorded the sworn statement of the assessee on 23/04/1999 in the

presence of the witness, Shri P.M. Abukoya, 20/565, Nambiyapuram, Palluruthy,

Kochi-6 who was a personal aide of the assessee when the assessee was staying

in the Dhanya Nursing Home, Palarivattom. In answer to Question No. 10, the

assessee stated that he had sold Kavitha Theatre for Rs.6.5 cores out of which

I.T.A. Nos.605/Coch/2005 & others

only Rs. 3 crores had been accounted and balance money was received in cash.

He also stated in reply to Question No. 11 that amount of Rs. 3 crores had been

utilized for repaying the unaccounted loan he had taken from Shri Siraj and other

persons. The balance amount was also used for purchase of Ooty property for

discharging bank liabilities, liabilities for car and for his personal and living

expenses etc. It was also stated that the assessee had invested about Rs.50

lakhs by way of deposits in the name of his wife, Smt. Farhana Essa Ismail Sait

in the SBI, Ooty. He had also stated that he had advanced an amount of Rs. 1

crore on pro-notes and cheques to Smt. Sobhamony at the rate of 18% per

annum. He also stated that had discharged loan amount of Rs. 1.25 crores and

Rs.1.50 crores to Shri Siraj, Valliyavettil Financers, Market Road, Ernakulam

during the last one year. He further stated that he had discharged liabilities of

nearly Rs.50 lakhs to other financiers during the last one year. He also stated

that as on 23/04/1999 he purchased 35 cents of land at Ooty at the rate of Rs.1

lakh per cent for construction of house which was entrusted to Shri

Jayachandran and had spent an amount of Rs.10 lakhs so far.

10.1 On the basis of the above, the Assessing Officer came to the conclusion

that the sale consideration of M/s. Kavitha Theatre was Rs.6.5 crores instead of

Rs.2.75 crores declared by the assessee. He considered the same amount as

sale consideration for determining the capital gain at Rs.4,02,87,338/- as against

the declared capital gain at Rs.20,27,017/-.

I.T.A. Nos.605/Coch/2005 & others

10.2 The contention of the Ld. AR is that the statement recorded by DDI(Inv.-

II), Ernakulam on 23/04/1999 u/s. 131 of the Act has no evidentiary value as it

is not supported by any corroborative material. Under section 131 of the Act,

the income tax authority is empowered to examine on oath. Section 131 of the

Act confers power to the income tax authority to record the statement in the

course of proceedings before them. The power invested u/s. 131(1) is only to

make enquiries and investigation and not basically meant to voluntary disclosure

or surrender of concealed income. As per section 31 of the Indian Evidence Act,

1878, admissions are not conclusively proved as against admitted proof. In the

absence of rebuttable conclusion, admission bind the maker when these are not

rebuttable or retracted. It was held by the Supreme Court in the case of

Pullengode Rubber Produce vs. State of Kerala (91 ITR 18) that an admission is

an extremely important piece of evidence but it cannot be said that it is

conclusive and the maker can show that it was incorrect. In the case of Satinder

Kumar (HUF) vs. CIT (106 ITR 64), the High Court of Himachal Pradesh held that

the admission made by an assessee constitute a relevant piece of evidence but if

the assessee contends that in making the admission, he had proceeded on a

mistaken understanding or on misconception of facts or untrue facts, such

admission cannot be relied upon without considering the aforesaid contention.

In the case of Avadh Kishore Das vs. Ram Gopal AIR 1979 (SC) 861, it was held

that evidentiary admissions are not conclusive proof of the facts admitted and

may be explained or shown to be wrong but they do raise an estoppel and shift

I.T.A. Nos.605/Coch/2005 & others

the burden of proof to the person making the admission. The Supreme Court

further held that unless shown or explained to be wrong, they are an efficacious

proof of the facts admitted. Thus, the burden to prove “admission” as incorrect

is on the maker and in case of failure of the maker to prove that the earlier

stated facts were wrong, these earlier statements are suffice to conclude the

matter. If retraction is proved sufficiently, the earlier stated facts loose their

effect and relevance as a binding evidence and the authorities cannot conclude

the matter on the basis of the earlier statements alone. However, bald retraction

of earlier admissions will not be enough even after retraction. Such statements

cannot automatically become nullified. If the assessee proves that the statement

recorded u/s. 131 was involuntary and it was made under coercion or during

their admission, the statement recorded u/s. 131 has no legal validity.

10.3 In view of the above, the CBDT issued circular in F. No. 286/98/2013- IT(Inv.II) dated 18th December 2014 stating as follows:

“Instances/complaints of undue influence/coercion have come to notice of the CBDT that some assessees were coerced to admit undisclosed income during Searches/Surveys conducted by the Department. It is also seen that many such admissions are retracted in the subsequent proceedings since the same are not backed by credible evidence. Such actions defeat the very purpose of Search/Survey operations as they fail to bring the undisclosed income to tax in a sustainable manner leave alone levy of penalty or launching of prosecution. Further, such actions show the Department as a whole and officers concerned in poor light.

I.T.A. Nos.605/Coch/2005 & others

gathering evidences during Search/Survey and to strictly avoid obtaining admission of undisclosed income under coercion/undue influence.

From the above Circular, it is amply clear that the CBDT has emphasized on its

officers to focus on gathering evidences during search/survey operations and

strictly directed to avoid obtaining admission of undisclosed income under

coercion/under influence. Keeping in view the guidelines issued by the CBDT

from time to time regarding statements obtained during search and survey

operations, it is undisputedly clear that the lower authorities have not collected

any other evidence to prove the impugned consideration received by the

assessee.

10.4 In the present case, it was explained that the assessee was seriously sick

and was in hospital when the statement was recorded on 23/04/1999. This

statement was later retracted by the assessee vide letter dated 05/05/1999

addressed to DDIT(Inv.-II), Ernakulam stating that he was not mentally fit to

give statement which was supported by a medical certificate dated 27/04/1994

issued by Dhanya Nursing Home, Palarivattom. There was also a letter dated

04/05/1999 written by his wife, Smt. Farhana Sait to the Department stating that

the statement given by the assessee on 23/04/1999 was not correct as the

I.T.A. Nos.605/Coch/2005 & others

assessee was not in a normal state of mind. Without commenting on the

authenticity of the retraction statement by his wife, we are of the opinion that

there is no corroborative evidence to support the claim made by the Assessing

Officer.

10.5 Before us, the Ld. DR filed a copy of the sworn statement of Smt.

Shobhamony recorded by TRO dated 29/03/2005 wherein she stated that she

was doing chitty business and received Rs.1 crore from the present assessee in

three instalments, Rs.25 lakhs, Rs.50 lakhs and Rs.25 lakhs. It was stated that

she had returned Rs.37 lakhs in instalments out of the advance. Regarding the

present status of the liability as on 29/03/2005, it was stated that she was

having no idea about the present position of the liability and presently had no

contacts with Shri Ismail Sait. Her statement does not indicate the date of

receipt of money and it cannot be said that the assessee had given Rs.1 crore to

Shobhamony out of the alleged on-money received by him. Further, the

statements recorded by TRO in different proceedings after making admissions,

have no relevance to the assessment proceedings which cannot be relied upon

for sustaining any addition towards alleged on-money received by him. Further,

the Ld. DR strongly relied on the power of attorney of Shobhamony dated

16/06/1999 alleged to be issued in favour of the assessee. We have carefully

gone through this additional evidence filed by the Ld. DR. The document was

written and notarized on 16/06/1999. However, as seen from the power of

I.T.A. Nos.605/Coch/2005 & others

attorney of Sobhamony, though she signed the document on 31/05/1999, there

was no witness to the document, the space provided for that purpose was kept

blank and no signature of Shri Essa Ismail Sait was found. Being so, it cannot be

considered as valid document and has no relevance to the addition made by the

Assessing Officer.

10.6 With regard to VDIS declaration of income by Shri Siraj, it was not the

declaration by the assessee. On the other hand, he was third party to the

declaration. In the VDIS declaration dated 22/12/1997, Shri Siraj had declared

income of Rs.1,14,47,800/-. This does not show that the assessee had given

money to Shri Siraj and received back any amount from him out of the

unaccounted sales consideration of the impugned landed property. Being so, the

VDIS disclosure does not show any nexus between the assessee and Shri Siraj

with reference to the receipt of on-money. Therefore, it cannot be considered as

supporting document to sustain the addition made by the Assessing Officer.

10.7 With regard to the sworn statement of Smt. Farhana Sait before TRO on

15/12/2004, she, being the ex-wife of Ismail Sait who got divorced on

21/03/2002, it was stated that in the financial year 1998-99, the assessee had

purchased 35 cents of land in Ootacamund and gifted 17 cents to Smt. Farhana.

This statement was recorded by TRO on 10/02/2005 and the assessment order

was passed on 29/03/2004. In the sworn statement, it was stated that she had

I.T.A. Nos.605/Coch/2005 & others

constructed a residential house in the said gifted property with assistance from

Ismail Sait and utilizing own funds. The landed property was attached by TRO

on 10/02/2005 in connection with recovery of tax arrears of the present

assessee, Shri Essa Ismail Sait. In the letter written by Smt. Farhana Sait to

ACIT, Circle-1(1), Ooty dated 15/12/2004, it was stated that she had no

connection with the recovery of tax arrears of Shri Ismail Sait. The purpose of

her statement and her letter was nothing but to avoid recovery of tax arrears of

Shri Ismail Sait. She also stated in the letter that Shri Ismail Sait had sold the

impugned property for a consideration of Rs. four to five crores which does not

specify the exact amount of sales consideration. Even otherwise,

uncorroborative statements collected after the assessment by the TRO cannot be

an evidence for sustenance of addition made by the Assessing Officer.

10.8 The Ld. DR also relied on the Bank account with SBI, Ooty wherein there was a

balance of Rs.2,04,67,000/- as on 31/03/1999. The assessee has filed balance sheet as

on 31/03/1999 along with original return of income as on 11/11/1999. This is not a new

document to be considered in re-assesssment. In our opinion, the details of this Bank

account were also made available to the Assessing Officer. He had considered it and it

was also explained before the CIT(A) that the balance amount in the SBI Bank account

arose out the amount received from Kavitha Theatre drawn from the credit balance in

the firm as partner. These details were also incorporated in the reconstitution of the

partnership deed dated 18/10/1998. Therefore, this bank statement also does not

support the case of the Department.

I.T.A. Nos.605/Coch/2005 & others

10.9 At this stage, it is pertinent to refer to the judgment of the Supreme Court

in the case of Vinod Solanki (2009) (233) ELT 157 observed as under :

"22. It is a trite law that evidences brought on record by way of confession which stood retracted must be substantially corroborated by other independent and cogent evidences, which would lend adequate assurance to the Court that it may seek to rely thereupon. We are not oblivious of some decisions of this Court wherein reliance has been placed for supporting such contention but we must also notice that in some of the cases retracted confession has been used as a piece of corroborative evidence and not as the evidence on the basis whereof alone a judgment of conviction and sentence has been recorded. [see Pon Adithan vs. Dy. Director, Narcotics Control Bureau (1999) 6 SCC 1] ...............

10.9.1 Yet again in Romesh Chandra Mehta vs. State of West Bengal (1969) 2

SCR 461 although this Court held that any statement made under ss. 107 and

108 of the Customs Act by a person against whom an enquiry is made by a

customs officer is not a statement made by a person accused of an offence, but

as indicated hereinbefore, he being an officer concerned or the person in

authority, s. 24 of the Indian Evidence Act would be attracted.

10.9.2. It has been similarly held by the Hon’ble Supreme Court in the case of

K.T.M.S. Mohd. & Anr. vs. Union of India (1992) (197 ITR 196) as under:

"We think it is not necessary to recapitulate and recite all the decisions on this legal aspect. But suffice it to say that the core of all the decisions of this Court is to the effect that the voluntary nature of any statement made either before the customs authorities or the officers of Enforcement Directorate under the relevant provisions of the respective Acts is a sine qua non to act on it for any purpose and, if the statement appears to have been obtained by any inducement, threat, coercion or by any improper means, that statement must be rejected brevi manu. At the same time, it is to be noted that, merely because a statement is retracted, it cannot be recorded as involuntary or unlawfully obtained. It is only for the maker of the statement who alleges

I.T.A. Nos.605/Coch/2005 & others

inducement, threat, promise, etc. to establish that such improper means have been adopted. However, even if the maker of the statement fails to establish his allegations of inducement, threat, etc., against the officer who recorded the statement, the authority, while acting on the inculpatory statement of the maker, is not completely relieved of his obligation at least subjectively to apply its mind to the subsequent retraction to hold that the inculpatory statement was not extorted. It thus boils down to this that the authority or any Court intending to act upon the inculpatory statement as a voluntary one should apply its mind to the retraction and reject the same in writing. It is only on this principle of law that this Court, in several decisions, has ruled that, even in passing a detention order on the basis of an inculpatory statement of a detenu who has violated the provisions of the Foreign Exchange Regulation Act or the Customs Act, etc., the detaining authority should consider the subsequent retraction and record its opinion before accepting the inculpatory statement lest the order be vitiated. Reference may be made to a decision of the Full Bench of the Madras High Court in Roshan Beevi vs. Jt. Secretary to the Government of Tamil Nadu, Public Deptt. etc. (1983) Mad LW (Crl.) 289 : (1984) 15 ELT 289 : AIR 1984 NOC 103, to which one of us (S. Ratnavel Pandian, J.) was a party."

10.9.3 The ratio that emerges from the aforesaid decisions is that once a

statement is retracted, the contents stated in the retracted statement must be

substantially corroborated by other independent and cogent evidence. It has

been consistently held by various courts that a sworn statement cannot be relied

upon for making any addition and must be corroborated by independent

evidence for the purposes of making assessments.

10.9.4 As regards the arguments of the ld. DR, we are of the view that the

statement recorded u/s. 131 cannot be independently used for making any

addition in the hands of the assesse and the said statement cannot, in our view,

be the sole basis for making any addition and must be independently

corroborated by evidences. Thus, on a careful reading of the decisions of the

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Hon’ble Supreme Court referred before us, we are of the view that the legal

position that emerges is that a sworn statement, though binds the assessee, it

cannot be the sole basis for making the assessment. It is open to the assessee to

show the circumstances in which confessional statements were recorded and

once the assessee proves that confessional statements were recorded under

threat and coercion and retracts from the same, the confessional statements

cannot be the sole basis for making assessments or for making any addition in

the hands of the assessee. The contention of the Ld. AR is that statements of

the assessee recorded on 23/04/1999 by Dy. Director of IT (Inv.)-II, Ernakulam

were not his voluntary statements but were recorded by the Dy. Director of IT

(Inv.) under threat and coercion. The learned DR, however, contended that the

statements of the assessee recorded on 23/04/1999 were the voluntary

statements of the assessee and there is nothing on record to establish that the

assessee was threatened to give the statements. It was further contended that

had there been threat, the assessee should have reported the matter to the

higher authorities. The statements have subsequently been retracted. Under

sub-s. (1) of s. 131 of the IT Act, statement can be recorded by the IT

authorities mentioned therein, that too only if some proceeding is pending

against the assessee on the date of the recording of the statement. The Dy.

Director of IT (Inv.) can also record the statement of any person under sub-s.

(1A) of s. 131 for the purposes of conducting any pre-search enquiries before he

takes action under s. 132 of the IT Act. Since in the present case, no

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proceedings were pending against the assessee, no statements have been

recorded under s. 131(1) of the IT Act by any IT authority. It was contended by

DR that there is a serach action u/s 132 of the Act in the case of Shri Jose

Mathew on 14-10-1998 and consequent to this statements of present assessee

Shri Essa Ismail Sait was recorded u/s.131(1A) of the Act by Dy. Director of IT

(Inv.) in connection with enquiry contemplated under s. 132 of the IT Act.

Therefore, the statements recorded by the Dy. Director of IT u/s 131 were valid

statements and must be for consideration and also for the purpose of reopening

the assessment.

10.9.5 On a careful consideration of the aforesaid submissions of parties , we

are of the view that statements were recorded u/s. 131 of the Act by Dy.

Director of IT (Inv.-II), Ernakulam, in relation to search action u/s 132 of the

Act in the case of Shri Jose Mathew on 14-10-1998 and these statements were

valid statements and could be used for the purpose of assessment of present

assesse provided they are supported by corroborative documents.

10.9.7.1 For this purpose, we place reliance on the judgment of Kerala High

Court in the case of Amway India Enterprises vs. Union of India and another

(262 ITR 428) held as under:

“Section 131 of the Income-tax Act, 1961, grants power to the Assessing Officer, during the course of assessment proceedings, to issue summons for discovery or inspection or for production of books of account as the case may be as are vested in the civil court. On the other hand, section

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131(1A) empowers the specific officer referred to therein including the Deputy Director to exercise the power under sub-section (1) notwithstanding the fact that no proceedings are pending before such authority and the summons so issued could be for the purpose of conducting an enquiry or investigation thereto provided he had reason to suspect that any income has been concealed or is likely to be concealed by a person or class of persons within his jurisdiction. If there is any reason to suspect concealment of income of any class of persons within his jurisdiction then he can exercise the power vested in him under section 131. In order to invoke the power under section 131 read with section 131(1A) the person to whom the summons is issued need not be within the jurisdiction of the officer concerned. On the other hand, if the officer concerned has reason to suspect that any person or class of persons in his jurisdiction is likely to conceal the income then he can invoke section 131 calling for the details from whomsoever concerned as empowered under section 131(1A).”

It is clear from the above judgment that DDIT(Inv.-II) could record the

statement u/s. 131 of the I.T. Act by invoking the provisions of 131(1A) of the

Act.

10.9.7.2 The Division Bench of the Hon’ble Madhya Pradesh High Court in the

case of Arjun Singh vs. Assistant Director of Income Tax (246 ITR 363)

specifically considered the issue whether the power under s. 131(1A) was

exercisable independently or in aid of the proceedings under s. 132 of the IT Act.

Noting such controversy on p. 390, the Court observed as follows :

"But, under sub-s. (1A) of s. 131 of the Act, the statutory officer or the Director General, or Director or Dy. Director empowered by the Board or Asstt. Director or the authorised officer referred to in sub-s. (1) of s. 132 of the Act, before he takes action under cls. (i) to (v) of that subsection, if he has reason to suspect that any income has been concealed or is likely to be concealed by any person or class of persons within his jurisdiction, then, for the purposes of making any enquiry or investigation relating thereto, it shall be competent for him to exercise the powers conferred under sub-s. (1) on the IT authorities referred to in that sub-s. notwithstanding that no proceedings with respect to

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such person or class of persons are pending before him or any other IT authority. The officers, i.e., the officers mentioned in sub-s. (1) of s. 131 are also possessed of the power of the Civil Court regarding discovery, production of evidence, etc., in relation to the judicial proceedings before them in regard to the assessment and there was no question of repetition of those officers performing judicial function in sub-s. (1A) of s. 131 of the Act, but the power under s. 131(1A), is exercised notwithstanding that no proceedings with respect to such person or class of persons are pending before him or any other IT authority, for the purpose of the items enumerated in cls. (i) to (v) mentioned therein. But under the power of such search and seizure under s. 132 of the Act, the concerned authority cannot exercise power as enumerated in cls. (a), (b), (c) and (d) of s. 131(1) of the Act, on the basis of the reasons to believe consequent upon information in his possession in regard to the undisclosed income or property in regard to the income or property which is concealed or is likely to be concealed. Sub-s. (1A) of s. 131 of the Act empowers him or makes him competent for exercise of power, in his jurisdiction, as conferred under sub-s. (1) of s. 131 on the authorities mentioned under sub-s. (1A) for proceeding against such person or class of persons for making enquiry or investigation relating to concealed income provided he has reason to suspect. Thus, the power under s. 131(1A) cannot be said to be an independent power in itself but is the power for the purpose of making enquiry and investigation relating to any income which has been concealed or is likely to be concealed by any person or class of persons, equipping him with the powers regarding discovery, production of evidence, etc., as provided under sub-s. (1) of s. 131 of the Act. The expression ‘before he, i.e., authorised officer, takes action under cls. (i) to (v) of s. 132(1) of the Act’ is material and relevant, that is the power regarding discovery, production, etc., as provided under sub-s. (1) of s. 131 can be exercised by the authorised officer before exercise of the power of search and seizure in cls. (i) to (v) of s. 132(1) of the Act. In fact, it is in the process of search and seizure if concealment of the income by some or other person or group of persons is found. The power under sub-s. (1A) of s. 131 is only an enabling power regarding discovery, production of evidence, etc., before entering into the actual exercise of search and seizure under s. 132 of the Act. Such a power under s. 131(1A) cannot be exercised for the purpose of reopening of the assessment under s. 147 of the Act."

10.9.8 In the aforesaid case, the Hon’ble Court thus held that powers under

sub-s. (1A) of s. 131 is only an enabling power before entering into actual

exercise of search and seizure under s. 132 and such a power cannot be

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exercised for the purposes of reopening the assessment under s. 147 of the IT

Act. The said decision is clearly applicable to the facts of the present case since

in the present case, it has been brought on record by the learned DR that the

Dy. Director of IT (Inv.) recorded statements of the assessee so as to cause

enquiry in exercise of power u/s. 132 of the Act in the case of Shri Jose Mathew

on 14-10-1998. In view of the aforesaid legal position, it clearly emerges that

statements of the assessee was recorded by the Dy. Director of IT (Inv.) u/s.

131 were valid statements in the eyes of the law and, therefore, the same

could be relied upon if it is supported by the corroborative materials.

Madras High Court held as follows:

“The principles relating to section 133A of the Income Tax Act, 1961, are as follows: (i) an admission is extremely an important piece of evidence but it cannot be said that it is conclusive and it is open to the person who made the admission to show that it is incorrect and that the assessee should be given a proper opportunity to show that the books of accounts do not correctly disclose the correct state of facts; (ii) in contradistinction to the power under section 133A, section 132(4) enables the authorized officer to examine a person on oath and any statement made by such person during such examination can also be used in evidence under the Income-tax Act. On the other hand, whatever statement is recorded under section 133A of the Income-tax Act it is not given any evidentiary value obviously for the reason that the officer is not authorised to administer oath and to take any sworn statement which alone has evidentiary value as contemplated under law; (iii) The expression "such other materials or information as are available with the Assessing Officer" contained in Section 158BB of the Income-tax Act, 1961, would include the materials gathered during the survey operation under Section 133A; (iv) The material or information found in the course of survey proceeding could not be a basis for making any addition in the block assessment; (v) Finally, the word "may" used in Section 133A (3)(iii) of the Act, viz., "record the statement of any person which may be useful for, or relevant to, any

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proceeding under this Act, as already extracted above, makes it clear that the materials collected and the statement recorded during the survey under Section 133A are not conclusive piece of evidence by itself.

A survey was conducted in the premises of the assessee-firm. One of the partners in his sworn statement offered an additional income of Rs.20 lakhs for the assessment year 2001-02 and Rs.30 lakhs for the assessment year 2002-03. However, the said statement was retracted by the assessee-firm in its letter dated August 3, 2001, stating that the partner from whom a statement was recorded during the survey operation under section 133A, was new to the management and he could not answer the enquiries made and as such he agreed to an ad hoc addition. The Assessing Officer based on the admissions made by the assessee, which were directly relatable to the defects noticed during the action under section 133A of the Act, recomputed the assessment. The order was set aside by the Commissioner of Income-tax (Appeals) and this order was upheld by the Tribunal. On appeal to the High Court:

“Held, dismissing the appeal, that in view of the scope and ambit of the materials collected during the course of survey action under section 133A shall not have any evidentiary value. It could not be said solely on the basis of the statement given by one of the partners of the assessee-firm that the disclosed income was assessable as lawful income of the assessee.”

11.1 On further appeal by the Department in Civil Appeal No. 13224 of 2008

and 6747 of 2012 dated 20/09/2012, the Supreme Court held as follows:

“Heard Counsels on both sides. Leave granted. Civil Appeal filed by the Department pertains to 2001-02. In view of the concurrent findings of the fact, this Civil Appeal is dismissed.”

Hence, the ratio laid down by the Madras High Court was confirmed by the

Supreme Court.

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(ii) In contradistinction to the power under section 133A, section 132(4) of the Income-tax Act enables the authorised officer to examine a person on oath and any statement made by such person during such examination can also be used in evidence under the Income-tax Act. On the other hand, whatever statement is recorded under section 133A of the Income- tax Act it is not given any evidentiary value obviously for the reason that the officer is not authorised to administer oath and to take any sworn statement which alone has evidentiary value as contemplated under law, vide Paul Mathews and Sons v. Commissioner of Income-tax [(2003) 263 I.T.R. 101];

(iii) The word "may" used in Section 133A (3)(iii) of the Act, viz., "record the statement of any person which may be useful for, or relevant to, any proceeding under this Act, makes it clear that the materials collected and the statement recorded during the survey under Section 133A are not conclusive piece of evidence by itself.

(iv) Finally, the statement recorded by DDIT(Inv.-II), Ernakulam on 23/04/1999 u/s. 131 cannot be the basis to sustain the addition since it is not supported by corroborative material.

the Madras High Court held as under:

“Assessment was made on the assessee under section 158BC of the Income-tax Act, 1961 for the period April 1, 1988 to December 8, 1998. The assessee has purchased land on October 26, 1998. The land was registered for Rs.4.10 lakhs. During the course of the search certain notings had been found. The assessee stated that he did not remember for what purpose he had made notings, which was confirmed by the

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assessee in a subsequent statement recorded on December 11, 1998. The land was purchased from one R. The purchasers’ statement was also recorded on the date of search, i.e., December 8, 1998. R admitted that he had received Rs.34.85 lakhs but subsequently in an affidavit he mentioned that the sale consideration received was Rs.4.10 lakhs. In a further sworn statement R again stated that he had received Rs.34.85 lakhs. In the cash flow statement for the assessment year 1999-2000, i.e. block period April 1, 1988 to December 8, 1998, the Assessing Officer adopted the sum in the cash flow relating to purchase of land at Rs.35.45 lakhs as against Rs.4,69,995 disclosed by the assessee in his cash flow statement. This resulted in an addition of Rs.30,75,005 as undisclosed income for the block period. The Commissioner(Appeals) noted that due to the conflicting nature of the statements given by the seller, his statement could not be relied upon and hence he deleted the addition made by the Assessing Officer. Aggrieved by the order of the Commissioner (Appeals) the Revenue filed an appeal before the Income- tax Appellate Tribunal. The Tribunal dismissed the Revenue’s appeal and confirmed the order of the Commissioner(Appeals). On appeal to the High Court:

Held, that the burden of proving actual consideration in such a transaction was that of the Revenue. The Assessing Officer did not conduct any independent enquiry relating to the value of the property purchased. He merely relied on the statement given by the seller. The deletion of the addition was justified.”

13.1 This judgment travelled to the Supreme Court in the case of CIT vs. P.V.

Kalyanasundaram (2006) (294 ITR 49) wherein it was held that in the absence of

enquiry, the Assessing Officer is not justified in making any assessment towards

purchase consideration of landed property on the basis of the statement of third

party who gave conflicting statement. In the present case, the statement of Shri

Ismail Sait who was in hospital, was retracted later. It was retracted by his wife

Smt. Farhana Sait and the Department has not brought on record any conclusive

proof in the form of corroborative materials that the consideration exchanged

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between the parties was at Rs.6.5 crores instead of Rs.2.75 crores as disclosed

by the assessee.

basis of sworn statement though it was retracted later by the assessee as well as

by his wife. The enquiry conducted by the Assessing Officer does not prove that

the assessee has actually received unaccounted onmoney on sale of the

impugned property. In the sworn statement recorded from purchaser Shri Jose

Mathew on 14-10-1998on 13/10/1998 by the ADIT, Ernakulam who is partner,

Kavitha Theatre has answered to Question No. 5 stated as follows:

“Q. No. 5 Recently have you entered into any agreement to buy or sell any property or have you bought or sold any property?

Ans. Our group has entered into an agreement to buy Kavitha theatre, Ernakulam with the owner Sri Babu. I have also signed in the agreement. The consideration is Rs.2.5 crores out of which less than one crore has been paid as advance. The agreement is to hand over the property before October, 1998. Myself along with my brothers E.M. Johny, E.M. Paul and Xavier Mathew have joined in the partnership firm along with Babu. We had joined the firm representing our group. I do not know whether the agreement has been registered with Income Tax Appropriate Authority. The details of these are with Sri E.M. Johny who is looking after the accounts of Kavitha Theatre. Apart from this we have property in Pollachi measuring 58 acres of which I am holding the Power of Attorney for sale. The income from this is accounted. The arrangements for sale was done by me. During the last three years myself and my wife has not purchased or sold any other property.”

assesee from the sale of landed property viz Kavitha Theatre over and above

the sale consideration disclosed by the assessee. The consideration shown in

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sale deed being a registered document by the registering authority, is to be

considered as real one which is acted upon by the parties. Hence, the

consideration disclosed therein is to be considered to determine the tax liability

of the parties. In the present case, evidence collected by the authorities was not

sufficient to establish the stand that the consideration exchanged between the

parties was Rs.6.50 crores instead of Rs.2.75 crores. Accordingly, we allow the

ground taken by the assessee. The appeal of the assessee is allowed.

money to Shri Ismail Sait. Since we have deleted the addition in the hands of the

assessee, these appeals by the Revenue are dismissed as infructuous.

of the Revenue are dismissed. Order pronounced in the open Court on this 17th January, 2019.

sd/- sd/- (GEORGE GEORGE K.) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER

Place: Kochi Dated: 17th January, 2019 GJ Copy to: 1. Smt. Farhana Sait, D/o Zakriah Sait, L/h of late Shri Essa Ismail Sait, 170, Farhana Manzil, Club Road, Oottacamund-1 Tamil Nadu. 3. 1Shri Martin Johnny, Edakkatukudy House, Ramallur, Kothamangalam.

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(ASSISTANT REGISTRAR) I.T.A.T., Cochin